Tax-free benefits for employees

2 Oct 2017

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Recent changes have removed the tax advantages of providing some employee benefits through salary sacrifice schemes. There are, however, other options for employers looking to incentivise staff. This taxation briefing is an update on some of the tax-free benefits that are available and which may be suitable for your business.

A note on salary sacrifice and optional remuneration

Since 6 April 2017 any benefits, other than employer pension contributions, childcare, cycle to work arrangements or qualifying low emission company cars will lose any tax advantages if provided under salary sacrifice or ‘optional remuneration’ arrangements. For benefits already provided under salary sacrifice where the arrangement began before 6 April 2017, tax advantages will be lost at the earlier of the date on which any changes are made to the existing arrangements, or 6 April 2018. The tax positions outlined in the remainder of this briefing assumes that benefits are not provided via such arrangements, unless otherwise stated.

Employer pension contributions

Employer contributions to registered pension schemes play an important part in funding retirement provision for directors and employees. The introduction of pension auto-enrolment and the forthcoming increases in mandatory contribution rates will mean that such contributions will take on an even more significant role in the coming years.

If you do not currently operate a salary sacrifice arrangement with your pension scheme, this is very much worth considering further, particularly if you are making changes to your pension scheme to meet your obligations under auto-enrolment.

Where an employer makes pension contributions on behalf of the employee, these amounts are not subject to tax or National Insurance contributions (NICs). Under a salary sacrifice arrangement, the employee does not make a contribution, but rather sacrifices gross pay for an additional employer contribution. This reduces National Insurance liabilities for both the employer and the employee. Further, employees do not then need to claim any higher and/or additional rate tax relief for the pension contributions on their tax returns.

Employers’ pension contributions can generally be claimed as an allowable business expense for tax purposes by the employer, provided the pension contribution meets the normal rules requiring expenses to be wholly and exclusively for business purposes.

Employers are also able to pay for professional pension advice for employees, worth up to £500 (including VAT) per employee per year, without giving rise to a tax/National Insurance charge. This is also an excluded benefit for the purposes of the new salary sacrifice rules, so employers should consider its inclusion in any ongoing salary sacrifice arrangements.

Childcare vouchers

Childcare vouchers are a government initiative to help working parents. The most common method of offering childcare vouchers is where parents elect to sacrifice part of their salary in return for childcare vouchers. The employer orders the childcare vouchers and these are used to pay the childcare provider directly. The amount that is available as a salary sacrifice and the amount saved in tax and NICs are dependent on the employee’s earnings.

The government is in the process of replacing this scheme with a new scheme (tax-free childcare). The new scheme commenced in 2017 and will run in parallel with the existing voucher scheme until at least April 2018, when only the new scheme will continue. The new tax-free childcare scheme gives tax-free top-ups on payments made by parents towards childcare costs, up to a maximum of £2,000 per year per child, unless the parents are earning over £100,000 per annum and both parents are working the equivalent of 16 hours a week or more.

There will be no direct role for employers in the provision of tax-free childcare (unlike childcare vouchers). However, employees already within a voucher scheme will have the choice of remaining in it where this is more beneficial. Parents earning between £100,000 and £150,000 are better off under the existing scheme: employers should, therefore, consider communicating with employees to ensure that they are aware of the impending change and the deadline for opting into the voucher scheme.

Payments by the employer for household costs

If an employee works at home by way of an agreement entered into with the employer, instead of working at the employer’s premises, or where the employee has no choice but to work from home (eg because the employer does not have available facilities) the employer can pay the employee up to £4 per week, tax and NIC-free, without needing to provide supporting evidence. Alternatively, employers can reimburse the actual additional costs of such homeworking tax-free, although in practice it may be difficult to evidence these costs with sufficient accuracy.

It is worth noting that for these purposes there does not need to be a formal written homeworking arrangement in place (although HM Revenue & Customs (HMRC) expects that there will be in the majority of cases). The exemption does, however, only cover employees who agree with their employer that they will regularly work at home – that is, employers cannot make a tax-free payment where an employee works at home occasionally or without proper agreement.

Other tax-free benefits

  • There are other, generally smaller, benefits that can be provided to staff without tax and National Insurance liabilities if the circumstances suit your business. Examples include:
  • Long service awards
  • Relocation expenses and benefits
  • Suggestion schemes
  • Professional subscriptions relevant to the employee’s role
  • Cycle to work schemes
  • Mobile phones
  • Free or subsidised canteens
  • Provision of parking facilities at or near the workplace
  • Welfare counselling services available to employees
  • Health screening, medical check-ups and eye care tests
  • Onsite sports and recreation facilities (including gyms) not open to the public
  • Annual staff parties where the cost to the employer for each person attending does not exceed £150 (including VAT) per year
  • Trivial non-cash benefits not in reward for duties performed as an employee that are no more than £50 per gift, per employee.

Looking forward

The 2017 Spring Budget promised a consultation on the tax and National Insurance treatment of benefits in kind, indicating that even after the optional remuneration changes this is an area that remains on HMRC’s radar. To date, however, no further information has been published.

How we can help you

We can assist in reviewing existing payroll arrangements to ensure they are fully compatible with current law and HMRC practice. We can also advise on improving current remuneration arrangements to provide tax efficient packages for employees and directors.

For more information regarding any of the issues raised here, please contact your usual Saffery Champness partner.